Bangkok--6 May--Standard & Poor's Standard & Poor's Ratings Services said today it revised its outlook on the sovereign credit ratings on the Socialist Republic of Vietnam to negative from stable on rising risks to macroeconomic stability from an overheating economy. At the same time, we affirmed our 'BB/B' foreign currency and 'BB+/B' local currency sovereign credit ratings on Vietnam. "Hectic investment activity of recent years appears to have pushed the economy to the limits of its capacity," said Standard & Poor's credit analyst Kim Eng Tan. "In April 2008, inflation increased to above 21% year-on-year, while we project the annual current account deficit to be maintained at close to 10% of GDP." Policy measures announced recently by the government should help rein in growth and prevent a further exacerbation of macroeconomic imbalances. However, rapid economic restructuring in recent years has made the task of economic management more complex. The weak banking sector, which experienced excessive credit growth in the past few years, aggravates this situation. Chances of policy missteps are, therefore, not negligible. Monetary policy response thus far has not been effective in addressing economic overheating. Partly as a result, domestic credit has expanded rapidly and we forecast it to rise to 95% of GDP by the end of 2008, from just 71% of GDP in 2006. Given the unproven risk management capability of domestic banks, an unexpectedly severe slowdown in economic growth could see sharply higher loan losses at many of these institutions. If the subsequent regulatory response is inadequate, this could potentially develop into a situation of widespread economic and financial distress that could only be resolved at substantial cost to the government. The credit ratings on the government could be lowered if the probability of this scenario materializing increases. The likelihood of the sovereign rating remaining at the current level could rise on indications that the economy will return to a sustainable growth path and that the financial fallout of economic rebalancing will be confined to a small number of systemically unimportant institutions. This would allow the outlook to revert to stable. "Despite the near-term risks, good prospects for sustained economic growth provide fundamental support for sovereign creditworthiness in Vietnam," added Mr. Tan. "In recent years, foreign investment has lifted the level of foreign reserves held by the central bank. Vietnam's positive net external credit position should help the economy withstand a large adverse economic shock." Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; select your preferred country or region, then Ratings in the left navigation bar, followed by Credit Ratings Search. Media Contact: David Wargin, New York (212) 438-1579 [email protected] Analyst Contacts: KimEng Tan, Singapore (65) 6239-6350 Elena Okorotchenko, Singapore (65) 6239-6375